The court’s discretion to order relief from forfeiture under s146(2) of the Law of Property Act 1925 is very wide. The court granted relief here, even though the breach had not been completely remedied, largely because of the "uncovenanted windfall" to the landlord if relief had been refused.

Facts

A tenant (F) held under a head lease of 7 commercial units forming part of an otherwise residential block of 150 flats let on long leases. The 99-year headlease was granted by L at a premium and there was a substantial rack rent achievable for the units. If the lease were forfeit to L it would achieve what was described as a "windfall" of between £1m and £2m.

The head lease contained a covenant not to underlet without landlord’s consent (consent not to be unreasonably withheld). A future lease of one of the commercial units had been granted, without landlord’s consent, to a restaurant. Further this occupier had occasioned many complaints from the residential units, which caused the landlord to complain about F’s breach of covenant "not to permit a nuisance or annoyance".

L issued proceedings against F and forfeiture of the head lease was ordered in September 2012. In March 2013 an application for relief from forfeiture was made. After this application for relief had been heard and refused F obtained a surrender of the future sub-lease. F then re-applied for relief from forfeiture. This time on the basis that it be given 6 months to complete a sale and assignment of the headlease, failing which it would surrender the headlease. The Court refused the re-application to grant relief. F appealed from this order to the Court of Appeal.

Issue

Whether the judge had directed himself correctly about what had to be shown to obtain relief from forfeiture where the breach was deliberate; and if not, how the court should exercise its discretion?

Decision

The Court of Appeal allowed the appeal on terms.

The Court pointed out that the discretion to grant or refuse relief is very wide. Section 146(2) states that the court may grant or refuse relief as it thinks fit having regard to the proceedings and the conduct of the parties and to "all the other circumstances".

Relief is available whether the tenant’s conduct was deliberate or not. The court may impose any conditions, as it sees fit, on the granting of relief.

The court held that the judge in the county court had misdirected himself, and granted the tenant relief from forfeiture on condition that the tenant assign the lease within six months (the tenant had by this stage asked for 1 year), failing which, the lease would be forfeited. Arden LJ said:

"The issue on this appeal is whether, despite the appellants' highly unsatisfactory conduct as Head Lessees, there should be relief from forfeiture because there has been some mending of their ways and because the head lessor would receive a [sic] uncovenanted windfall if forfeiture took place".

The court referred to the comments in Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224 by Patten LJ that it is not enough simply to show that if relief is refused the landlord will gain a windfall as:

"If . . . [t]he defendants' conduct in this case amounted to a conscious disregard of the terms for relief which the court had imposed then it would be much more difficult to argue that the refusal of further relief was wrong in principle even though it would produce a windfall for the landlord. The balance to be struck will obviously depend on the relevant circumstances."

Arden LJ confirmed the windfall point has to be considered first and then “has to be thrown into the balance with all the other circumstances”, including the tenant’s deliberate conduct. No other special circumstances need be shown in spite of the deliberate breach. In the present case the head leasehold interest could not simply be valued at nil because it had now been forfeited, as the judge had held. The judge had misdirected himself. (As to Magnic - see the case report below).

Comment

The Court of Appeal acknowledged that there might well be cases where the court could refuse relief from forfeiture even if it means that the landlord benefits from a windfall, if no other way of securing the performance of the tenant's covenants can be found.

A commercial tenant, whose long lease (granted at a premium) had been forfeited by peaceable re-entry for non-payment of rent, was entitled to relief from forfeiture despite its 14-month delay in applying for relief.

Facts

A tenant (T) took a lease of premises on an industrial estate for a term of 125 years on payment of a premium of £90,000. The current landlord was L and at the date of the hearing the lease was worth approximately £275,000. The lease required T to pay ground rent, insurance charges and service charges (reserved as rent).

T provided MOT and garage services from the premises. A restraining order was made against the tenant and one of its directors in connection with the issue of fraudulent MOT certificates, and the director was subsequently sent to prison for MOT fraud carried out at the premises. The director was diagnosed with depression.

In April 2014 L forfeited the lease by peaceable re-entry for non-payment of service charge in the sum of £2,155. L did not seek to relet. In June 2015 T applied to the High Court for relief from forfeiture under the court's equitable jurisdiction on the basis that it was "ready willing and able to pay the arrears of service charges and seeks relief from forfeiture under the court's equitable jurisdiction on such terms as the court thinks fit, just and equitable".

Issues

Whether T should be entitled to relief from forfeiture, and

If so, on what terms?

Decision

The High Court granted relief to T on terms.

The Court noted that where a landlord forfeits a lease by peaceable re-entry, the court’s jurisdiction to grant relief from forfeiture is not circumscribed by statute. The court has an inherent equitable jurisdiction to grant relief at any time and the 6-month time limit laid down in s210 of the Common Law Procedure Act 1852 does not apply (i.e. 6 months from execution of the order for possession, where there are at least 6 months of arrears and the landlord has issued forfeiture proceedings). However, this will be taken as a guide to the court in the exercise of its jurisdiction.

The Court also noted that in considering any application it should:

Refuse only in exceptional circumstances, where the arrears have been paid;

Save in exceptional circumstances, ignore any other breaches; and

Consider the impact on any third party who has acquired rights.

On the question of delay, Chief Master Marsh, taking account of the restraining order, the director’s depression, the lack of specialist advice and the director’s belief that a valuable lease could not be taken away, said this:

"The discretion to grant relief is a broad one and I am not constrained by a fixed time limit which prevents the court from granting relief. Reasonable promptitude is an elastic concept which is capable of taking into account human factors, including those I have mentioned. Although 14 months is more than double the guide period of 6 months (and near to the breaking point for the concept's elasticity), I am satisfied that it would be wrong to bar [T] from obtaining relief in the circumstances of this case."

On the question of terms, although the original sum due to L was comparatively modest, by the date of the court hearing, ground rent, service charge, insurance and business rates coupled with L's legal fees (which the court reduced by 50%) and interest meant that T in fact owed £24,530. The court granted relief on the basis that sum is paid by T, and the court considered that payment "within 12 to 16 weeks of the trial date ... is sufficiently soon to be the 'immediately foreseeable future'."

Comment

This case follows recent authority (see above) that the court is more likely to allow relief from forfeiture where the lease is valuable to avoid the ‘uncovenanted windfall’ effect. The decision also highlights the need for landlords to consider carefully whether to forfeit by peaceable re-entry or court proceedings where the need for certainty for possession arises.

Where a tenant has failed to comply with the conditions for granting relief from forfeiture, a balancing act must be carried out looking at the reasons for non-compliance and whether forfeiture is therefore a just and proportionate response.

Facts

A landlord (L) acquired the freehold of a property subject to an existing lease and sub-lease. The lease was acquired by a tenant (T) shortly afterwards. The sub-lease was owned by T’s son (ST). ST ran a take-away restaurant from the premises.

The sub-lease and the head-lease both contained covenants not to contravene the Town and Country Planning Act 1990. Conditional planning permission had been obtained to operate a take-away restaurant from the premises. Unable to install ducting for a fume-extraction system outside the demise, the conditions could not be met, and the planning lapsed, but the use as a take-away business continued in breach of covenant.

The court hearings and applications and counter-applications in this case are both numerous and complicated. In short, however, L brought possession proceedings against T, which were compromised on the basis of a consent order granting relief from forfeiture to T on terms.

T failed to comply with the terms of the consent order and L ultimately obtained a possession order in January 2011, which contained a provision that if T ceased using the premises as a take-away business by 11 February 2011, relief from forfeiture would be granted.

The possession order was stayed on 8 February 2011, pending an appeal and T continued operating a take-away business at the premises until 31 May when the stay was lifted following the dismissal of the appeal.

In March 2012, L commenced new proceedings for a declaration that the head-lease was forfeit (and that it was entitled to possession) because of T’s failure to cease trading by 11 February 2011, and T applied for relief from forfeiture on the basis that the stay delayed the deadline date on which to cease trading.

First instance

Relief from forfeiture was refused by the district judge, and the declaration of forfeiture made; the district judge confirming that the effect of the stay had not had the effect of extending the deadline for T to cease trading. The district judge also refused to extend the time for ceasing trading retrospectively.

Decision on appeal

The Court of Appeal considered that the earlier stay granted had not extended the time for stopping trade, but also considered that T had (on legal advice) believed that it had. Patten LJ said:

”the purpose of .. a right of re-entry in the event of .. a breach of covenant is to provide the landlord with some security for the performance of the tenant's covenants. [It] is not intended to operate as an additional penalty for breach. It is an ultimate sanction designed to protect the landlord's reversion from continuing breaches of covenant which remain unremedied and to secure performance of the covenants” the court went on to add that in most cases relief will be granted on condition of remedying the breach and paying costs.”

Although, the court added, T’s conduct was a cause of concern for any reasonable landlord, there was no suggestion that the breaches could not be remedied. On the question of the interim stay, the court considered there was no reason not to retrospectively extend the time for ceasing business until 31 May.

However, the court went on to say that it was not limited in exercising discretion to grant relief from forfeiture on terms simply to the situation that existed at the date of forfeiture. Pattern LJ said:

"In principle it seems to me right that [L] should be put into the position it would have been in had the breaches of covenant not occurred. If the Head Lease is to be restored it ought therefore to be on terms that [T] pay the costs of the works carried out to the Premises and the other outgoings in respect of rent, rates and insurance for which they are liable under the Head Lease. If there is any dispute between the parties as to whether [T was] responsible for the removal of the load-bearing wall or as to the amount paid by the landlord to carry out the works of repair, these issues can be referred to a District Judge for determination."

In addition, the court confirmed that payment of L’s costs by T was an additional term of granting relief from forfeiture. The costs of the appeals were to be dealt with separately and simply fall as costs of litigation, rather than as a condition of the grant of relief from forfeiture.

In this case the court was concerned with breaches of the immmoral user covenant and the alienation covenant. Relief was granted upon terms, which included the payment of costs. For a full note of the case see this page.

The Court of Appeal held that, in the absence of special circumstances, landlords should receive their costs on an indemnity basis where the tenant successfully applies for relief from forfeiture, notwithstanding comments to the contrary by Lord Templeman in Billson v Residential Apartments Ltd (No 1) [1992] 1 AC 494 at 541 (see paras 98 to 104 of this case). Lord Templeman had misunderstood the effect of an order for indemnity costs. At para 98 and 99:

"In Billson v Residential Apartments Ltd (No 1) … Lord Templeman held that it was wrong to award costs on the indemnity basis against a tenant who failed in his application for relief against forfeiture. He also deprecated the imposition of a term for obtaining relief as to the payment of indemnity costs, as a general practice. He said:

'But it seems to me that in principle a tenant should not be at the mercy of an order made by a judge who has no means of knowing the effect of the order and imposes no impartial criterion by which costs can be taxed down.'

That suggests that Lord Templeman may have misunderstood the effect of an order for the payment of costs on the indemnity basis. Such an order does permit the taxation of costs and provides impartial criteria for the determination of the amount payable. Before 1999 the criterion was set out in RSC Order 62 rule 12(2). Now it is to be found in CPR Part 44 rule 44.4(1) and (3)."

And at para 104:

"I have come to the conclusion that the indemnity basis should apply as a general principle, despite what Lord Templeman said, and that there is nothing in the circumstances of the present case to make it appropriate either to adopt the standard basis or to disallow some part of the Claimants' costs. As it seems to me, the factors which led the Court of Appeal in Egerton v Jones to decide in favour of a more generous basis of costs than party and party (which seems to me to be the equivalent of the modern standard basis) are still relevant as a general principle, and that normally this should require that the applicant for relief should pay the landlord's costs on the indemnity basis, rather than only on the standard basis. I therefore consider that K&J should be required K&J to pay the Claimants' costs of the proceedings at first instance on the indemnity basis as a condition of obtaining relief against forfeiture."

"At the time when the judge gave his judgment Mr Eastaugh was publicly funded. He is no longer publicly funded. However, it is clear from the judge's findings that Mr Eastaugh is entitled to not insubstantial assets. In my judgment, nothing in Section 11 of the Access to Justice Act 1999, which protects publicly funded litigants, prevents this court from providing that as a condition of obtaining relief from forfeiture Mr Eastaugh should pay not merely the costs which could be ordered against him under Section 11, but the difference between those costs and the percentage of the costs which the Landlord has incurred. In my judgment it would be fair, in these circumstances, to make an order to that effect for the reasons that I have given. In concluding that relief from forfeiture should be given, I take into account that the sums due to Mr Crisp are relatively minor and in addition that the lease has a considerable period yet to run."